Lexi Holdings plc v Luqman (Court of Appeal)

The Court of Appeal considered whether two non‑executive family directors, Monuza and Zaurian Luqman, by virtue of their inactivity, breached fiduciary and common law duties and thereby caused loss to the company arising from large-scale misappropriations by the managing director, Shaid. The court reviewed the applicable standard of conduct for directors (an objective baseline with a possible subjective uplift) and the requirement to prove causation between the breach and the loss claimed.

The court accepted that the sisters knew of Shaid's previous convictions and of various suspect transactions, but found that Briggs J had erred in not attributing to them knowledge that the Directors' Loan Account was fictitious. That knowledge, the court held, would have required them to take steps (inform auditors and fellow directors and impose controls or remove Shaid) which would in all probability have prevented the subsequent misapplications. On that basis the Court of Appeal allowed the appeal in part and declared them liable in equity for specified sums attributable to misapplications after their appointments.

Background and parties: Lexi Holdings Plc (in administration) brought proceedings to recover £59,607,498 misappropriated by its managing director, Shaid Luqman. The administrators and Lexi pursued claims against family members who were directors or recipients of diverted funds, including sisters Monuza and Zaurian. This appeal arises from a trial before Briggs J on causation and directors' liability where he held that, despite breaches of duty by the sisters, their inactivity had not caused the loss save in respect of sums paid to them.

Nature of the claim and procedural posture: Lexi sought equitable compensation or damages against Monuza and Zaurian for breach of fiduciary and common law duties. The issues before the Court of Appeal were whether the sisters' failures as directors caused any part of the overall misappropriations and, if so, the quantum attributable to each. The appeal followed Briggs J's judgment of 16 July 2008 and his order of 22 July 2008; prior orders included summary judgment against Shaid and parts of the claim against other family members.

Issues framed by the court:

• What steps, consistent with a director's duties, would the sisters have taken had they acted with the required degree of skill and care?
• Would those steps, on the balance of probabilities, have prevented or reduced the losses caused by Shaid's fraud?
• How should the objective/subjective standard of director conduct be applied in this family-run company?

Court's reasoning and conclusions: The Chancellor analysed the duties of directors, emphasising both the objective baseline standard and the possibility of a higher subjective standard where a director actually possesses greater skill. The judge below had accepted that the sisters should have informed the board of Shaid's convictions and certain suspect transactions but concluded that, even if they had done so, Barclays and others would still have adopted a cooperative approach and the fraud would not have been prevented. The Court of Appeal accepted much of the judge's analysis but identified a significant error: Briggs J did not consider the alternative hypothesis that the sisters, properly performing their duties, would have appreciated that the Directors' Loan Account was fictitious. That fact would have obliged them to inform the auditors and their fellow directors and to seek external controls or removal of Shaid. It was probable that those steps would have prevented the later misapplications. Consequently the appeal was allowed in part and declarations made that the sisters were liable to Lexi for specified sums.

Subsidiary findings: The court noted the limits of reliance on what third parties (banks or auditors) would have done and confined its causation analysis to what the directors should have done and the probable immediate consequences within the company.

Appeal allowed in part. The Court of Appeal concluded that Briggs J erred by not treating as proved that, had the appellants properly performed their duties, they would have known that the Directors' Loan Account was fictitious; that knowledge would have required them to inform auditors and fellow directors and to impose controls or remove the managing director, and on the balance of probabilities those steps would have prevented the subsequent misappropriations. Accordingly the court declared each sister liable in equity for the sums attributable to misapplications after their appointments.

Appeal from Mr Justice Briggs (Chancery Division), HC06C04067. Prior interlocutory and substantive orders included Briggs J's orders of 23 November 2007 (summary judgment on part of the claim against Waheed and declarations as to liability for Monuza and Zaurian) and the judgment of 16 July 2008 on causation and liability. This Court of Appeal judgment handed down 26 February 2009 ([2009] EWCA Civ 117).